Dodd-Frank was established to address the financial crisis, and has accomplished much. But at the same time it has also caused numerous complications.
Research suggests that Dodd-Frank regulations weakened small banks, restricted lending to small businesses and reduced economic growth. As such, businesses will welcome regulatory relief provided in the new Economic Growth, Regulatory Relief, and Consumer Protection Act.
Changes in Regulations
Dodd-Frank introduced a complex set of rules and regulations for businesses to comply with, costing taxpayers $3 billion as it employed 2,600 new full-time Federal workers in its implementation and taking 24 million hours each year from private job creators – enough time for two Panama Canal constructions!
Certain rules have proven successful, such as mandating banks hold more liquid assets such as Treasury bonds. This increases their ability to raise funds quickly in a crisis situation. Furthermore, the Volcker rule prohibits insured deposits banks from engaging in any speculative betting using their own capital.
Some changes have come at the cost of expensive tradeoffs, including curbing the Federal Reserve’s emergency lending authority and needing congressional permission before providing temporary liquidity guarantees. And still more unfinished tasks remain to be addressed such as streamlining U.S. financial regulatory system while giving more autonomy and authority to new macroprudential agencies.
Requirements for Risk Assessments
After the financial crisis of 2008, lawmakers passed the Dodd-Frank Act in order to reduce risk in banking systems. This massive piece of legislation established several government agencies such as Financial Stability Oversight Council and Consumer Financial Protection Bureau; furthermore it created numerous rules designed to keep companies within financial markets and overall economies.
Dodd-Frank granted the Federal Reserve with additional powers to regulate systemically significant financial firms and introduced an orderly liquidation authority as a means for dealing with failing financial institutions. While we cannot know for certain how these changes would have influenced SVB’s demise, they may have helped soften its impact on wider financial systems.
Critics contend that these provisions and other elements of Dodd-Frank have increased the vulnerability of small and midsize banks to failure, specifically with regard to capital requirements, Volcker Rule implementation, stress testing metrics and stress test metrics that make success more challenging for these types of institutions.
Requirements for Due Diligence
This act established a whistleblower program that rewards employees who report security violations, while strengthening the Sarbanes-Oxley Act by adding regulations regarding CEOs and other corporate insiders’ reporting responsibilities for errors.
The Act mandates financial institutions to create and implement a due diligence system for detecting suspicious transactions, known as due diligence. This involves gathering and analyzing information regarding an entity’s business and operations – as well as transactions – in order to detect any red flags.
The act also included several consumer protection provisions, such as requiring lenders to provide truthful mortgage and credit score information as well as offering a 24-hour toll-free consumer hotline. Other requirements included splitting large banks’ investment from commercial activities as well as the Volcker Rule prohibiting certain speculative investments – these measures were meant to prevent future financial crises without taxpayer bailouts, yet their critics counter that they create moral hazard and reduce competitiveness relative to foreign competitors.
Requirements for Disclosures
The Dodd-Frank Act established new regulations to prevent future financial crises from devastation, by raising capital requirements, improving oversight of major financial firms, and creating the Consumer Financial Protection Bureau. Furthermore, the Financial Stability Oversight Council and an Orderly Liquidation Authority were also created as measures against such failure.
The Act introduced provisions to encourage whistleblowers in reporting security violations by insiders in the financial industry and provided an incentive system for those providing information to authorities. Furthermore, it increased transparency for derivative trades while restricting short selling on certain stocks.
Dodd-Frank had many successes in its efforts to strengthen the financial sector. Unfortunately, however, its regulations had some drawbacks that were detrimental to both financial stability and economic growth, such as forcing the Federal Reserve to make emergency loans available more widely rather than offering them only to one institution at once and forcing it to seek congressional resolution before providing temporary liquidity guarantees on debt.